Consumer prices in the U.S. rose to their highest level in 31 years in October, making life a little less comfortable for the inflation is temporary camp. The CPI climbed 6.2 percent year-over-year, the highest reading since it reached 6.3 percent in October, 1990. Those two observations are the only two above the 6.0 percent mark since Paul Volcker took the helm at the Federal Reserve to fight inflation that had soared to 14.8 percent in 1980. The monthly increase in the CPI for October was 0.9 percent, replacing an October, 2020 reading of 0.1 percent. Looking ahead, the next three months will see readings of 0.2, 0.2, and 0.3 percent replaced in the trailing twelve-month calculation, suggesting that consumer inflation is likely to remain uncomfortably high, at least into the first quarter of next year.
Treasury Secretary, and former Fed Chair, Janet Yellen said over the weekend that the path of inflation moving forward will depend on the pandemic, and how quickly demand patterns return to normal. For current Fed Chair Powell, whose term is set to expire in February, the current spike in consumer prices has to be uncomfortable as he awaits a decision by the President whether he will be reappointed. That decision is expected to come before Thanksgiving, now just a little over one week away.
Bond Yield Up Following the CPI Release; Treasury Market Volatility Rises
Bond yields climbed higher following the CPI release, rising 12 basis points by week's end to close at 1.56 percent. That increase followed a sharp decline in the ten-year yield after the Fed meeting on November 3 which, despite the Fed's announcement of the commencement of tapering its bond buying program beginning this month, was viewed as a relatively dovish outcome regarding the outlook for interest rates.
The ten-year note yield was 1.60 percent prior to the Fed's announcement. The two-year note yield experienced similar volatility, climbing 11 basis points following the CPI release on Wednesday to end the week at 0.51 percent. Treasury market volatility overall has been rising steadily. Since a mid-September reading of 52 in the ICE Bank of America MOVE index, a weighted average of volatility across the Treasury curve, the index reached a then year-to-date peak of 78 just prior to the November Fed meeting, subsequently falling to 65. Following the CPI release last Wednesday, however, it surged higher once again, ending the week at 79.
Stocks Struggled to Hold Record Highs; Investors Turn Their Attention to the Economic Calendar
Stocks wobbled in response to the CPI report, before stabilizing over the course of Thursday and Friday. The two days of modest gains were not enough, however, to prevent the S&P 500®
index from experiencing its first weekly loss in the past six. The 0.3 percent decline left the index just shy of the record closing high of 4701 it had reached on Monday. The CPI report also resulted in an increase in the dollar, with the DXY index rising from 93.96 to 95.13 at Friday's close, its highest level since July, 2020. The DXY index is now higher on the year by almost 6 percent.
With third quarter earnings season winding down, investor focus will shift back toward the economic calendar. Scheduled reports on this week's calendar include October retail sales, which is expected to be quite strong, as is industrial production. Also scheduled are the home builders index, housing starts and building permits, jobless claims and leading indicators. And on Monday, President Biden is expected to sign into law the infrastructure bill, recently passed in the House after a long delay while negotiations continued on the Build Back Better social infrastructure bill. They remain ongoing.
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The Consumer Price Index (CPI) measures change in consumer prices as determined by the US Bureau of Labor Statistics.
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